What Does Yahoo's Search Decline Mean and–More to the Point–Can It Be Stopped?

“Microsoft eats, sleeps and drinks search,” said one Yahoo source to me this week. “And we just don’t.”

That was one very stark way of explaining why Yahoo, the No. 2 search player, continues to lose market share in the lucrative online arena, even as Microsoft’s Bing service has been slowly gaining.

The latest proof of this came this week from a comScore (SCOR) report that showed a decline of 0.5 percent, to 17.5 percent, for Yahoo (YHOO) in November, even as Microsoft (MSFT) saw a gain from 9.9 percent to 10.3 percent, and Google (GOOG) had a slight uptick, from 65.4 percent to 65.6 percent.

Yahoo’s share is the lowest it has seen and part of a nearly year-long decline in search for the Silicon Valley Internet giant.

That hurts, according to a variety of internal sources at Yahoo, as well as analysts, since each point of lost share represents $100 million to $150 million in revenue.

What Khan means is that Yahoo’s revenue per search is a lot lower than that generated by Google. And–since Yahoo has a much lower market share–the average is higher.

Still, no one at Yahoo wants to watch search share seep away.

So, not surprisingly, a spokeswoman for the Internet giant–echoing sentiments of CEO Carol Bartz since she signed the search and online advertising pact with Microsoft earlier this year–said Yahoo is committed to excelling in search, especially in search experience.

The spokeswoman also maintained that Yahoo’s share will change for the better as soon as a series of recent updates to Yahoo search–and as increased “infusion” of search throughout site, such as in email–kicks in.

In addition, she noted that Yahoo’s $100 million “It’s Y!ou” marketing campaign is about to turn its attention to the site’s “hero products,” including search.

Since that is still to come and because many of the other changes “were put into place just in September,” she said, improvements will be apparent in the months ahead and not now.

Lastly, the spokeswoman added, some of the declines are related to the inevitable impact of Yahoo losing “non-economic” toolbar and affiliate distribution deals to Microsoft and Google.

Before the comScore figures came out, in fact, Bartz underscored this particular point at an investor conference last week, and Khan also noted it in a recent report.

“We are concerned by this [search decline] trend, but we think some of the market share loss is associated with the discontinuation of tool bar and affiliate deals,” he wrote. “We believe that many of these deals were uneconomical and were created solely to expand its market share. Thus, we think this market share loss will have a much lower impact on profitability than many investors fear.”

Maybe so, but Bing’s slow and steady gains since the new service was launched this summer is still not a plus for Yahoo.

And while those gains are due in part to those pricey distribution deals, they have also been boosted by Microsoft’s own $100 million Bing marketing campaign and an increasingly hopped-up innovation war with Google.

Yahoo, for the most part, has been missing in action in that loud battle, although the company has indeed released a series of new features, including recent integration with Twitter and an upcoming one with Facebook, to increase more real-time search results.

But both Google and Microsoft have done similar deals and continue to update search on a much speedier schedule.

What this ultimately means to the pending MicroHoo partnership will be interesting to watch, since the deal makes more money for Yahoo the higher its share of search.

As part of the agreement–under which Microsoft takes care of the technology for both Yahoo and itself (using, ironically, a lot of former Yahoo techies it has poached)–the software giant will pay Yahoo almost 90 percent of the revenue it gets from search on Yahoo sites.

Less search share, of course, means less revenue, even if Yahoo is not paying for the costs of delivering that search.

On the plus side, Khan and others have noted recently that a recovery in the graphical advertising business could give Yahoo’s stock a boost.

Since Yahoo does eat, sleep and drink display, this might counter its search shortfalls, until, presumably, Yahoo can stop them.

I think the NSA has a job to do and we need the NSA. But as (physicist) Robert Oppenheimer said, “When you see something that is technically sweet, you go ahead and do it and argue about what to do about it only after you’ve had your technical success. That is the way it was with the atomic bomb.”

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